An Out of Whack Domestic Oil Industry

October 3, 2017

 

This photograph pretty much sums up the current state of America's domestic oil industry. The ship is an empty VLCC class oil tanker being piloted thru the Corpus Christi Ship Channel on its way to load unconventional oil produced from  the Eagle Ford shale play in South Texas. Once loaded it will be turned around and headed back to sea, bound for some undesignated foreign port full of American light tight oil. LTO  exports from the US have now risen to almost 1.65 million BOPD.

 

In the background, behind the ship, across the channel from Port Aransas, we  see two deep-water semi-submersible 'floaters.' At the moment there are actually three large floaters warm stacked at Port Aransas, all out of work because of three years of depressed oil prices. The offshore Gulf of Mexico oil and gas industry, as well as almost

the entire conventional onshore industry in

America, has been at a virtual standstill since   2015. Not so the United States shale oil industry.

 

WHO NEEDS HIGHER OIL PRICES?

 

In the 3rd quarter of 2016, OPEC, Russia and other Non-OPEC oil producing countries around the world announced a unilateral effort to reduce daily crude production and to raise the price of oil.  Whatever the rest of the world took off the market over the past 12 months, however, the America LTO industry quickly put right back on the world market and oil prices have been range bound in the mid $40's as a result. Obviously that is not a price level that works economically for deepwater exploration in the GOM. 

 

Mid $40 oil prices do not economically "work"  for the shale oil industry either but that has not slowed it down.  LTO  extraction remains woefully unprofitable and the shale oil industry is still outspending revenue. Its new "breakeven price" campaign, suggesting it can be profitable at $40 oil or below, conveniently leaves out lots of real costs, like corporate overhead and interest expense per produced barrel of oil. The shale industry has not been able to de-leveraged much of its massive legacy debt the past three years; quite the contrary, in fact. My research now indicates that cumulative debt owed by upstream shale oil E&P's, including the $80B that has already been walked (Haynes & Boone), is re-approaching $300 billion. In spite of increased well productivity  and slightly better earnings reports for 2Q17, mostly presented on a non-GAPP accounting basis, things are not getting much better financially for the shale oil industry. Wood MacKenzie Analytics and the Society of Petroleum Engineers agree, both state the shale oil industry might finally become profitable by 2020, providing WTI oil prices rise to $60 a barrel.  

 

The "resilience" the US LTO industry continues to exhibit, and that is such a great source of pride for some,  has absolutely nothing whatsoever to do with it being able to stand on its  financial feet. It is simply a function of its ability to kick the debt can down the road, sell assets, reduce shareholder equity and keep borrowing more money. The shale oil industry does not need higher oil prices, it just needs other people's money.

 

EXPORTING AMERICA'S  FUTURE AWAY

 

The United States is the largest crude oil consuming country in the world, by a wide margin. According to the EIA, crude oil imports into the US in May of 2017 were 7.45M BOPD, a little less than half of what we actually consume each day. Exporting the last of America's hydrocarbon resources, which is exactly what unconventional shale resources are, is based on the gross misconception that we now have so much light tight oil remaining to be extracted in the United States we can become hydrocarbon independent and sell the left-overs to anyone that will take it, at a big discount to worldwide Brent prices, no less. 

 

Just this week, virtually overnight, in a miracle of reserve accounting that would shame even the Middle East, IHS Markit doubled the amount of technically recoverable oil reserves in the Permian Basin to a whopping 70 GBO. But since 2009 we have drilled 11,801 HZ wells in the Permian, spent nearly $100 billion doing so, and recovered 1.35 billion barrels of unconventional oil from that basin (data from shaleprofile.com). So, in the absence of more "technological breakthroughs" (which in the past for the LTO industry has simply meant more frac sand per perforated foot), it will likely take 400,000 wells, and $4 trillion to get that 70 GBO out of the ground, if it even exists.

 

By the way, and also from shaleprofile.com, for nearly a decade now we have been hammering away at Bakken, Eagle Ford, Niobrara and Permian Basin unconventional resource plays  and to date have drilled a staggering 76,000 HZ shale  wells. Thru May of 2017 all of those wells have  recovered 7.0 GBO of crude oil. At approximately 5.8 GBO of crude oil consumption each year in American (EIA), that's only about 15 months worth of supply. Bakken and Eagle Ford production peaked in 2015. Mark Papa, the former head of EOG, recently said both the Bakken and Eagle Ford are already "spent" plays.

 

But, if you are a believer in the shale oil "revolution" this photograph is affirmation that  indeed America is "unleashing" it's hydrocarbon might on the rest of the world by increasing LTO exports. Sort of, anyway, because it is all mostly being done on credit and a lot of it hasn't even been paid for yet. We have somewhere around 12-15 years of proven, developed, economically recoverable unconventional shale oil reserves in America (EIA). Selling those reserves today for $40 a barrel, so that we inevitably have to buy them back someday in the not so distant future from OPEC for $140 a barrel, makes no sense whatsoever. 

 

So, here is a novel idea to add to America's short sighted energy policies: lets NOT  allow oil exports until we become entirely hydrocarbon independent in the US (not doable, sorry), or we re-construct and modify our domestic refinery capacity to handle all the LTO America can produce, whichever comes first. America does not have enough oil left to "unleash." Best to keep some of it in the ground (gasp!), for the sake of our kinds and grandkids.

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